Extreme Networks Buys Enterasys For $180 Million

Deal doubles Extreme's revenue and bolsters its position in a competitive market.

Extreme Networks said on Thursday that it's acquiring Enterasys Networks. The deal, in which Extreme is acquiring all outstanding shares of Enterasys for $180 million in cash, appears to be intended to extend both companies’ viability in a market dominated by Cisco and Hewlett-Packard.

“The combination brings together two leaders and long-time players in the Ethernet networking space,” Extreme CEO Chuck Berger said during a conference call with analysts and media. “We will be the largest company focused on Ethernet switching.”

Meanwhile, Chris Crowell, CEO of Enterasys, was more direct: “Scale matters in this business.”

By effectively doubling in size, the new Extreme will now find itself fighting with Dell and Juniper for the third, fourth and fifth spots in a market led by Cisco Systems and HP, Mark Fabbi, a distinguished analyst with Gartner, said in an email interview.

Fabbi said the acquisition increases both companies’ odds of survival in a market in which they had been fringe players.

“Without doing something, I could only see a long, slow death spiral as they slowly lost customers and the ability to innovate,” he said. “And it would be a very slow death as both players still had basic financial viability and access to cash.”

Extreme reported a net profit of $16.2 million on revenue of $299.3 million during the fiscal year ended June 30, down from a net profit of $21.7 million on revenue of $322.7 million the previous year. The company reported cash and investments worth $205 million.

Enterasys, which is a private company and thus has not reported profit or cash reserves, claims $330 in annual revenue. It employs about 900 people, compared with 750 at Extreme.

Fabbi said Extreme should benefit from adding Enterasys’ wireless and network management technologies, while the combined companies will also be able to improve their operating margins by eliminating redundant administrative functions such as HR and finance.

Berger told those on the conference call that there was another important motivation for the deal: tapping into Enterasys’ established infrastructure for demand and lead generation, an area in which he acknowledged Extreme has been lacking.

“It would take us years and significant expense to get to this level of sophistication and effectiveness,” said Berger.
Despite the clear advantages the deal provides for Extreme, Fabbi said the company still faces an uncertain future in a market that’s hardly bursting.

“The campus switch market is at best flat, and, like other legacy businesses, will be prone to price erosion over time,” he said. “While having Cisco selling at premium prices helps the small players maintain margin, it’s inevitable that prices and likely margins will come down.”

But Berger said Extreme’s customers should feel more confident in the company’s future--and in the continued value of their Ethernet switching investments--as a result of the acquisition.

“We will support the full product roadmap of each company going forward,” he said."

Executive promises aside, Mike Fratto, principal analyst at Current Analysis, said via email that it will take time to put Enterasys' devoted client base at ease.

"Learning a new product will take time and training," said Fratto. "Enterasys customers should get a clear understanding of the roadmap once the deal closes."

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